The economy appeared to have recovered from the deep recession of 2007.
After the recession ended, the unemployment rate fell to 5.5 percent, which is a typical estimate for the natural rate of unemployment.
There was positive job growth for 61 months from March 2010 to March 2015.
Many economists think we have reached full employment.
It did not seem like the economy had recovered completely.
There is a difference between analyzing monetary neutrality and crowding short run and long run macroeconomics.
MyLab Economics can help you study more efficiently.
We have separated the short and long run in the book.
One of the most important dimensions of macroeconomics is the relationship between the two.
What we mean by macroeconomics is different from what we mean by other macroeconomics.
Wages and prices don't change immediately in response to changes in demand, as we explained in Chapter 9.
The period of time in which prices are not very high.
Wages and prices change over time, and the economy does not change very much.
When wages and prices don't change, short-run analysis applies.
After wages and prices have largely adjusted to changes in demand, full-employment economics applies.
There is a period of time in which prices can change.
Fiscal policy, such as tax cuts or increased government spending, can affect demand and GDP because they affect the money supply.
In the long run, GDP is determined by the supply of labor, the stock of capital, and technological progress--in other words, the willingness of people to work and the overall resources the economy has to work with.
Full employment is a characteristic of the long run.
Because the economy is operating at full employment in the long run, output can't be increased in response to changes in demand.
An increase in government spending won't increase GDP in the long run because spending on one good or service has to come at the expense of another good or service.
Increasing the supply of money won't increase GDP in the long run.
The price level in the economy will rise as a result.
Wages and prices are not always the same.
If demand for scooters increases at the same time that demand for tennis rackets decreases, we would expect to see a rise in the price of scoot ers and a fall in the price of tennis rackets.
Wages in the scooter industry would tend to go up, and in the tennis racket industry they would go down.
Wages and prices can go up or down in industries.
Steel, automobiles, food, and fuel may all increase in price.
When GDP exceeds its full-employment level or potential output, wages and prices tend to increase together.
When GDP falls below full employment or potential output, wages and prices will fall together.
Firms will find it difficult to hire and retain workers if the economy is producing above full employment.
It is easy to get and change jobs.
Firms will raise their wages if they are prevented from leaving.
Firms will have to raise their wages even higher if one firm raises its wage.
Wages are the largest cost of production.
Firms have no choice but to raise the prices of their products as labor costs increase.
As prices rise, workers need higher nominal wages.
This is a representation of the real-nominal principle.
The real value of money or income is more important than the face value.
It happens when the economy is able to change wages at a level of output that exceeds its potential.
The economy is producing below full employment or potential output.
Unemployment will be higher than the natural rate.
Firms will find it easy to hire and retain workers.
The average level of wages in the economy falls when firms cut wages.
Wages are the largest component of firms' costs.
Prices start to fall when wages fall.
The theory was resurrected recently by Lawrence Summers, former U.S. Secretary of the Treasury and President of Harvard University.
Interest rates can't fall enough to create enough demand for investment goods because of a series of structural factors.
The only reason the U.S. economy has been able to have enough demand over the last few decades is because of easy credit.
Both episodes ended in recessions.
The economy doesn't generate enough demand without easy credit.
At this time, it makes sense to increase spending on infrastructure.
The economy has grown consistently since the last recession and the unemployment rate in 2015 was close to the natural rate.
Keynes argued that the U.S. economy suffered from sary for the economy to operate at full employment.
According to this theory, there is an exercise.
Increased government spending was available at secular stagnation.
As World War II brought sufficient aggregate demand, the H.-Summers1.pdf was accessed in March 2015.
The table summarizes our discussion of unemployment, output and wages.
In addition to the changes in wages and prices that occur when the economy is producing more or less than full employment, there is also ongoing inflation in the economy.
For example, if the economy has been operating at full employment, it has experienced 4 percent annual infla tion.
If output exceeds full employment, prices will rise faster than 4 percent.
If output falls to a level less than full employment, prices will rise at a slower rate.
Unemployment is above the natural rate.
The output is above potential.
The output is below potential.
Wages and prices throughout the economy will rise when output exceeds potential output.
Wages and prices will fall if output is less than potential.
The economy can return to full employment graphically.
It's easy to understand the transition between the short run and long run.
Wages and prices increase if GDP is higher than potential output.
The economy will be pushed back to full employment by this increase in wages and prices.
Changing prices and wages can help move the economy from the short to the long run.
There are two aggregate supply curves, one for the level of prices and the other for the real GDP demanded.
Firms adjust production to meet demand when the price doesn't change very much in the short run, because the vertical line means that firms are producing all they can in the long run.
The idea that in the long run, out put is determined solely by factors of Returning to Full Employment from a Recession production and technology is reflected in a vertical aggregate supply curve.
The adjustment process for an economy producing at a level of output exceeding full employment or potential output was looked at in an earlier chapter.
How the Economy Recovers from a Downturn if the economy is operating below full employment, as shown in panel a, prices will fall, shifting down the short-run aggregate supply curve, as shown in panel B.
Panel B shows us how to do it.
Unemployment is above the natural rate when output is less than full employment.
Firms find it easy to hire and retain workers, and then prices begin to fall.
The short-run aggregate sup ply curve shifts downward as prices decrease.
The downward shift is caused by lower costs for firms.
Competition will lead to lower prices.
The shift in the short-run aggregate supply curve will bring the economy to long-run equilibrium.
This point shows a lower level of prices and a higher level of output.
Full employment is less than the higher level of output.
The short-run aggregate supply curve will be shifted downward by falling wages and prices.
The unemployment rate is at the natural rate and the economy is at full employment.
The long run has been made possible by the economy.
Output returns to full employment when prices are lower.
This is how the economy recovers from a downturn.
Unemployment will be below the natural rate when out put exceeds potential.
The wage-price spiral will begin in an upward direction instead of being in a downward direction as in Panel B.
Until the economy returns to full employment, the aggregate supply curve will shift upward.
The economy will return to its long-run equilibrium when wages and prices rise.
If the economy is operating above full employment, prices will rise, shifting the short-run aggregate supply curve upward, as shown in panel A.
Economists agree on the answer.
Some economists say it takes the U.S. economy 2 years or less, some say 6 years, and others say somewhere in between.
There is room for policymakers to guide the economy back to full employment because of the slow adjustment process.
This may take a long time.
The economy will experience excess unemment and a level of real output below potential during that time.
Expansionary policies, such as open market purchases by the Fed or increases in government spending, can shift the aggregate demand curve to the right.
If the econ is producing at a level of output above full employment, demand policies can prevent a wage-price spiral.
We can reduce aggregate demand by not allowing an increase in wages and prices to bring the economy back to full employment.
Slashing government spending or tax increases can be used to reduce aggregate demand and the level of GDP until it reaches potential output.
stabilization policies look simple on paper or on graphs.
Economic stabilization is difficult to achieve in practice because of lags and uncertainties.
Suppose we are in a recession and the Fed decides to increase aggregate demand using expansionary monetary policy.
The aggre gate demand curve will take a while to shift to the right.
It is possible that the economy would be restored to full employment before the effects of the monetary policy were felt.
The wage-price spiral would occur when the aggregate demand curve finally shifts to the right when the expansionary monetary policy kicks in.
Monetary policy would have hurt the economy.
If the adjust ment is quick, active economic policies are more likely to affect the economy.
The economy adjusts rapidly to full employment and is generally opposed to using monetary or fiscal policy to try to stabilization the economy according to economists like Milton Friedman.
Keynes believed that the economy adjusted slowly and was more sympathetic to using monetary or fiscal policy to stabilization the economy.
It is possible that the speed of adjustment can change over time, making it more difficult to make decisions.
After the recession of 1990 the advisers for the president had to decide if the economy needed any moreStimulus.
They took only a few small steps based on the belief that the economy would recover on its own.
The economy recovered by the end of the Bush administration, but it was too late for his reelection.
It may take a long time for the economy to recover from a recession without active policy.
Keynes was unsure if a country could recover from a major recession without active policy.
There were two different reasons for these doubts.
The adjustment process requires interest rates to fall in order to increase investment spending.
The United States and Japan both faced similar problems during the first decade of this century.
We assumed policymakers were motivated to use policy to improve the economy.
This is how a political business cycle might work.
A politician might use expansionary monetary policy or fiscal policy to boost the economy after an election.
The incumbent politician may be reelected if voters respond favorably to lower unem economy before the election.
The politician can engage in contractionary policies to avoid this.
The economy booms before an election but contracts afterwards because of actions taken by politicians for reelection.
Good news comes before the election, and bad news after the election.
The classic political business cycle does not always happen, but a number of episodes fit the scenario.
Inflation was caused by expansionary poli cies used by President Richard Nixon during his reelection campaign in 1972.
President Jimmy Carter tried to reduce inflation with contractionary policies just before his reelection bid in the late 1970s.
There may be links between elections and economic outcomes.
There may be systematic differences between political parties and economic outcomes.
The effects of economic policies are taken into account.
The second innovation was to know that the public would expect politicians to manipulate the economy.
If Republicans are elected, they will contract the economy to fight inflation, while Democrats will help the economy.
If the public doesn't know who will win the election, there will be a contractionary surprise if Republicans win and an expansionary surprise if Democrats win.
According to the original political business cycle theories, bent presidents trying to manipulate the economy in their favor economic growth should be less if Republicans win and gain reelection.
If Democrats win, research began to incorporate.
Other, more realistic factors are included in the postwar U.S. evidence.
Exercise 2.9 is related to it.
The first innovation was to know that political parties have different goals.
Changes in wages and prices restore the econ crowding out using graphs.
Let's take a closer look at the adjustment process in terms of these factors so we can better understand how it works.
When an economy is producing below full employment, wages and prices will fall.
The tendency will be for wages and prices to rise when an economy is producing at a level above full employment or potential output.
The demand for money is affected by changes in prices.
The principle is real-nominal.
The real value of money or income is more important than the face value.
The amount of money people want to hold depends on the price level in the economy.
If prices are cut in half, you can purchase the same goods and services with less money.
Decreases in the price level will cause the money demand curve to shift to the left, while increases in the price level will shift it to the right.
Let's use this idea.
The economy might be in a recession.
There will be excess unemployment if output is below full employ ment.
Prices and wages will fall.
The price level falls when the economy is below full employment.
M15_OSUL5592_09_GE_C15.indd 343 3/15/17 9:03 PM was operating below full employment.
The demand for holding money decreases when the price level falls.
As the level of investment in the economy increases, total demand for goods and services also increases, and the economy moves down along the aggregate demand curve as it returns to full employment.
The aggregate demand curve is downward sloping because of the interest rate effect.
Lower prices lead to lower interest rates, higher investment spending, and a higher level of aggregate demand as we move down the aggregate demand curve.
The curve slopes downward because aggregate demand increases as the price level falls.